Honeywell's New CEO Is The Right Man

Newly installed
Honeywell
Chief Executive
David M.
Cote
David M. Cote
has his work cut out for him. Lucky for Cote, the Morris Township, N.J.-based diversified manufacturer has undertaken a restructuring program that should allow him to get straight to work on improving performance.

Honeywell
In his final days as CEO,
Lawrence A.
Bossidy
Lawrence A. Bossidy
, who held the post until Feb. 26, led the streamlining, which includes big cost cuts and exiting non-core businesses and a $325 million writedown for an 11-year lawsuit and investments that went dead during the fourth quarter. Thanks to the restructuring, Cote can concentrate on boosting productivity and growing sales again at the various units, which include everything from aerospace to control technologies for business to specialty chemicals.

Since the economic recovery won't likely be full-throttle this year, expectations for a growth spurt aren't great for Honeywell
--which had $24 billion in 2001 revenue--since it is in a cyclical business. But there's much optimism for Cote, 49. He is familiar with Honeywell's business, having served as chairman, president and CEO at
TRW
, which sells space, defense and automotive products. And he was part of one of the nation's most revered management teams at
General Electric
.

"Cote offers this company its first young, long-term, well-equipped CEO," says Prudential Securities analyst Nicholas Heymann. He points out that Honeywell's merger with
Allied Signal
and the failed talks with GE left the company's direction in limbo.

With restructuring out of the way, Cote can concentrate on optimizing Honeywell's asset portfolio and ridding the company of under-performing businesses like carpet fiber and investing in areas where it can jump-start sales, like turbochargers. To do that, he'll need to fine-tune productivity enhancers like Design for Six Sigma--redesigning a product in order to eliminate errors that hamper the product's performance.

"It's a major enhancer of operating margin because it reduces inefficiencies," says Heymann.

Along with Six Sigma, Honeywell should get a boost in productivity by moving most of its business onto the Web. The process, known as Digitization, will streamline its in-house operations and improve communication with clients and suppliers. GE has had success using the process, which cuts costs and reduces working capital, Heymann says.

In 2001's fourth quarter, Honeywell posted earnings of 55 cents a share, down from 71 cents in the same period a year earlier. Revenue was $5.9 billion, 9% lower than last year's $6.4 billion. Aerospace sales fell 13%, and better sales in military and government avionics failed to counter severe weakness in commercial aviation. Sales also slipped at the automation and control-solutions units, while demand was slack for its control products and services. Specialty materials sales tumbled 21%, hurt partially by softness in electronics markets.

Although asbestos claims tied to its truck brake pad business are still a worry, Honeywell's $100 million in reserves is adequate coverage. "It's probably one of the lowest-risk primary exposures in industry in America that we're aware of," says Heymann, noting that most of the valid claims have been identified.

While restructuring has scaled down general spending and administrative expenses by $221 million so far, it's also helped boost free cash flow to $626 million and insulate fourth-quarter margins. Heymann expects sales to fall 4% this year to $22.8 billion due to the sale of its hydraulic brake business and ongoing weakness in commercial aviation. But low-single-digit growth should begin in fiscal 2003, when aerospace sales flatten or increase.

"That's based off of negative 2% gross domestic product growth," he says, which means the numbers will be stronger if the economy grows at a faster rate.

Already scoring $9 billion in military contracts, including the secondary power distribution system for the A380 plane last year, Honeywell's aerospace arm nabbed an additional $2 billion in aerospace business for products and services for commercial and military aircraft. The company expects to see about $5 billion in sales for contributing to
Lockheed Martin
's
joint strike fighter program.

Edward Wheeler, an analyst at Buckingham Research, says the cost cuts that are in place at Honeywell will put it in a good position when the economy picks up in 2003. He adds that the company is in good hands with Cote.

"He did a lot [at TRW]," Wheeler says. "He organized the company, increased cash flow and brought about internal improvements." Something that Honeywell can use right about now.